Sunday, December 4, 2011

What cash proceeds did Troutman receive from issuance of the bonds?

Troutman Enterprises issued 8%, 8-year, $1,000,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2010, and are issued on that date. The discount rate of interest for such bonds on April 1, 2010, is 10%. What cash proceeds did Troutman receive from issuance of the bonds?

Hint: Compute the present value of bonds.|||Present value of $1 in 16 periods at 5% is .458 (multiply by $1,000,000 - face amount of bonds)

Present value of annuity of $1 for 16 periods at 5% is 10.84 (multiply by $40,000)

The total of the two values is the present value of the bonds. The number of periods is 16 and the interest rate is 5% because its semiannual compounding. Each interest payment is $40,000 ($1,000,000 x 8% x 1/2).